This website uses cookies to give you the best user experience, for analytics, and improvement of functionalities of this website and third party sites. You can learn more about our use of cookies and similar technologies and your choices by reviewing our Cookies Policy. By clicking "I agree" you agree to our use of cookies and similar technologies.

The item you have requested is not currently available in English and you have been redirected to the next available page. You may use your browser's back button to return to the item you were viewing.

With 125+ locations in 50+ countries, Dentons is home to top-tier talent that is found at the intersection of geography, industry knowledge and substantive legal experience. Working with Dentons, you will have the opportunity to learn from the best lawyers in the industry at the largest law firm in the world.

The Supreme Court reinforces the SAAMCo Principle

The Supreme Court reinforces the SAAMCo Principle

Regional Capabilities:

March 27, 2017

The Supreme Court in BPE Solicitors v. Hughes-Holland [2017] UKSC 21 (also known as Gabriel v. Little) has considered for the first time, and reinforced, the principles set out in the landmark professional negligence case of South Australia Asset Management Corporation v. York Montague Ltd [1997] A.C. 191, a case often misunderstood and misapplied. The Supreme Court found that, although the firm of solicitors had been negligent in failing to identify the correct purpose of the loan, the loss suffered did not flow from their negligence. Instead, the loss flowed from a poor commercial decision to lend money for which the solicitors were not liable.

Facts

Mr Richard Gabriel lent £200,000 to his friend, Mr Little (the Loan). Following a conversation with Mr Little, Mr Gabriel had assumed that the purpose of the loan was to redevelop a disused heating tower which Mr Little owned (the Tower).

The Tower was, in fact, owned by High Tech Fabric Maintenance Ltd (High Tech), a company owned and controlled by Mr Little. However, Mr Little used the Loan to purchase the Tower from High Tech for £150,000 through a special purpose vehicle called Whiteshore Associates Limited (Whiteshore), and used the remaining £50,000 to meet High Tech's VAT liability.

Mr Gabriel did not commission a valuation. Instead, he attended the Tower and formed the view that it was worth circa £150,000 and after the redevelopment would be worth circa £400,000.

Mr Gabriel instructed BPE Solicitors (BPE) to draft a loan facility agreement between Mr Gabriel and Whiteshore, and charge for the Loan (the Loan Documents). Rather unconventionally, the instructions came through Mr Little and the solicitor did not seek confirmation or clarification from Mr Gabriel directly. The solicitor used a template loan facility agreement which he had drafted in a previous abortive matter for Mr Gabriel, which stated that the purpose of the Loan was to "assist with the costs of the development of the property". This was in accordance with Mr Gabriel's view of the purpose of the Loan, but not Mr Little's.

Whiteshore defaulted on the Loan and the Tower was only sold for £13,000, all of which was absorbed by the costs of sale, meaning that Mr Gabriel made no recovery from the sale.

Lower courts' decisions

Mr Gabriel issued a claim against various defendants, one of which was BPE. Mr Gabriel sought to recover all of his losses as a result of BPE's breach of duty of care to exercise reasonable care and skill.

The trial judge held that Mr Gabriel would not have made the Loan had his misunderstanding as to the intended purpose been corrected and therefore, but for BPE's breach of duty of care, no loss would have been suffered.

The Court of Appeal held that BPE had negligently failed to correct Mr Gabriel's erroneous understanding of the purpose for the Loan. However, it held that the loss suffered fell outside the scope of BPE's duty of care to Mr Gabriel. BPE's instructions did not extend to advising Mr Gabriel on the Loan and/or the commercial risks of the Loan. Therefore the loss suffered was not caused by BPE's breach of duty of care. Mr Gabriel's damages were therefore reduced to nil.

Supreme Court

The appeal was dismissed. The judgment was handed down by Lord Sumption with the remaining four Lord Justices of the Supreme Court agreeing.

The Supreme Court held that, although BPE negligently drew up the loan facility agreement by stating the incorrect purpose for the Loan, BPE's instructions were only to draw up the Loan Documents and it was only liable for losses which flowed directly from its negligence in this regard. Therefore BPE was not liable for all of the losses which flowed as a result of Mr Gabriel's own commercial decision to lend the money.

The SAAMCo Principle

In coming to his decision, Lord Sumption clarified and reinforced the well-known, yet misunderstood, SAAMCo principle, which arose from the House of Lords' decision in South Australia Asset Management Corporation v. York Montague Ltd [1997] A.C. 191 (SAAMCo). The SAAMCo principle is a general principle of the law of damages in professional negligence cases, especially against valuers and conveyancers.

The SAAMCo case concerned a negligent overvaluation of a property. The damages were limited to the difference between the negligent valuation and the true valuation at the time; the lender claimant was not entitled to recover more than the amount it would have lost had the valuation not been negligent.

In SAAMCo, Lord Hoffman made a distinction between: (1) the duty to provide information to enable clients to decide on a course of action (Adviser of Information); and (2) the duty to advise clients what specific course of action to take (Adviser of Action). The negligent Adviser of Information is only liable for foreseeable financial consequences of the information being wrong, and not for the financial consequences of the advisee deciding to take a specific course of action. This is the case even if the information is paramount to the decision-making process. On the other hand, the negligent Adviser of Action is liable for all losses which flow from the course of action taken; this is on the basis that the adviser is responsible for the action taken.

The SAAMCo principle was approved and applied in Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd (Interest on Damages) [1997] 1 W.L.R. 1627. In that case, Lord Hoffman reiterated the two stages in the SAAMCo principle. First, ascertaining the loss which would have been avoided had there been no wrongful act. Second, awarding damages for the proportion of the loss which fell within the scope of the defendant's duty.

Lord Sumption recognised that damages awarded under the SAAMCo principle may not be "mathematically precise", but the SAAMCo principle is "essentially a legal rule which is applied in a robust way without the need for fine tuning or a detailed investigation of causation".

Despite being imperative to the question of damages in professional negligence cases, over the last two decades, the SAAMCo principle has been misunderstood and misinterpreted. Lord Sumption considered that two fundamental features of the SAAMCo principle have been disregarded. The first is that the Adviser of Information has no legal responsibility for the decision to take a particular course of action; it is only responsible for providing information to enable the advisee to make a decision. The second is that the SAAMCo principle is separate from the "causation of loss"; it is a calculation of damages.

The Supreme Court held that the purpose of the SAAMCo principle is that it "excludes loss that would still have been suffered even if the erroneous information had been true, that is simply a tool for giving effect to the distinction between (i) loss flowing from the fact that as a result of the defendant's negligence the information was wrong and (ii) loss flowing from the decision to enter into the transaction at all".

To help rationalise the SAAMCo principle, Lord Sumption commented on the two categories as follows:

Adviser of Action: The adviser is responsible for taking into account all factors which will impact on the decision to take a particular course of action. If a factor is negligently ignored or misjudged, and proves to be paramount to the decision to take that course of action, the advisee is entitled to recover all losses flowing from the course of action. The negligent Adviser of Action is liable for the overall riskiness of the transaction.

Adviser of Information: The adviser is contributing a limited part of the information for the advisee to make a decision. The process of considering other relevant factors and assessing the overall commercial merits of the transaction are matters for the advisee. The adviser's overall duty does not extend to the decision itself and therefore the negligent adviser is only liable for the financial consequence of that particular information being wrong.

Conveyancers

In addition to professional negligence cases against negligent valuers, the SAAMCo principle is paramount to determining damages in professional negligence cases against solicitors.

Lord Sumption found that the trial judge had erroneously found BPE liable for Mr Gabriel's whole loss by applying Bristol & West Building Society v. Fancy & Jackson [1997] 4 All ER 582 (Bristol & West), which Lord Sumption found was incorrectly decided because it failed to correctly apply the SAAMCo principle.

In Bristol & West, the Court of Appeal held the conveyancer was liable for the whole loss arising out of the lender's decision to lend money to its customer to purchase a property. Lord Sumption categorised the conveyancers as Advisers of Information, who provide information to lender clients in accordance with standard practice. The lender uses this information together with the details of the amount of the valuation, the amount of the loan, and considerations as to the borrower's ability to repay the loan, in order to decide whether to advance the moneys. The conveyancers do not assume responsibility for identifying to the lender all relevant factors to make the decision and do not advise the lender whether to make the loan. Lord Sumption stated that in this case the conveyancer was an Adviser of Information and not an Adviser of Action, and therefore the conveyancer should not have been liable for the whole loss.

Burden of proof

The Supreme Court upheld the Court of Appeal's finding that the burden of proof rests with the claimant to prove the facts which engaged the SAAMCo principle. In other words, the claimant must prove the losses suffered fell within the scope of the defendant's duty of care, and that, had the defendant not breached that duty of care, the loss would not have been suffered (even if the information provided was correct).

Viability

Prior to making the Loan, Mr Gabriel did not obtain a valuation of the Tower to ascertain its value either at the time of the Loan or after the redevelopment. In reliance of the evidence before it, the Court of Appeal held that, even if the Loan had been used to redevelop the Tower, the value of the Tower would not have increased.

Application

Lord Sumption held that BPE had not assumed responsibility for Mr Gabriel's decision to make the Loan; BPE's clear instructions were to draw up the Loan Documents. BPE had negligently confirmed in the loan facility agreement that the intended purpose of the Loan was the redevelopment of the Tower. BPE was merely responsible for assuming Mr Gabriel's intended purpose was correct.

The next question considered was what, if any, loss was attributed to BPE's incorrect assumption. As stated above, Lord Sumption held that, even if the Loan was used to redevelop the Tower, the evidence showed that Mr Gabriel would have made the same loss as the value of the Tower would not have increased. Therefore, Mr Gabriel suffered loss as a result of a poor commercial decision to lend Mr Little's company £200,000. This was a decision taken by Mr Gabriel himself and fell outside BPE's scope of duty of care.

Commentary

Almost 20 years after the SAAMCo decision, we have a welcome review and confirmation that Lord Hoffman's judgment remains good law for the purposes of ascertaining damages in professional negligence cases. However, the Supreme Court's judgment will have wide implications for professionals.

Although there are often difficulties in the mathematical calculation of the damages, as acknowledged by Lord Sumption, the SAAMCo principle nevertheless remains the key determinator of the quantum of damages in negligence cases against all types of professionals in commercial transactions.

The Supreme Court has provided useful reinforcement of the established SAAMCo principle in professional negligence cases. It reiterated the two categories of advisers and the reasoning for the distinction and the fact that Advisers of Information are only liable for losses which flow from their negligence. If the loss would have been suffered even if there had been no negligence, the professional adviser will not be liable, as was the case here.

Importantly the case establishes that conveyancers are Advisers of Information, not Advisers of Action, as incorrectly held in Bristol & West. As a result, conveyancers are liable, not for all losses, but only for losses which flow as a direct result of that negligent information. Solicitors will welcome this decision, which expands their ability to argue that certain losses fall outside their duty of care.

Disclaimer

Unsolicited emails and other information sent to Dentons will not be considered confidential, may be disclosed to others, may not receive a response, and do not create a lawyer-client relationship. If you are not already a client of Dentons, please do not send us any confidential information.

Copy link to Tweet

Embed this Tweet

Important Notice

Please read the following terms and conditions carefully. Access to the information contained herein is on the basis that you understand and agree to these terms and conditions.

The following pages of the website are not addressed to, or intended for use by:
(1) persons located in the United States,
(2) citizens of the United States
(3) permanent residents ('green card holders') of the United States,
(4) entities organized in the United States or their overseas affiliates.

No person or entity falling into any of the above categories has contributed to the creation or provision of any of the information provided in these pages.

Under Sanctions imposed by the US Office of Foreign Assets Control, persons and entities falling into these categories are prohibited from engaging, or facilitating the engagement by others, in any commercial relationship with Iran. If you believe you may fall into any of these categories, do not access these web pages.

Under sanctions imposed by the Government of Canada, Canadian citizens and persons located in Canada should be aware that they are prohibited from engaging in or facilitating the engagement of others in, certain commercial activities involving Iran or certain persons (individuals and entities) in Iran. In addition, the sanctions law of other countries, including the United States, may apply to certain commercial activities by Canadians. Any Canadian or person in Canada who accesses these webpages should seek legal advice on the applicability of Canadian and foreign sanctions before engaging in or facilitating in any commercial activities involving Iran or persons in Iran.

Dentons accepts no liability in respect of any breach of applicable Sanctions arising as a consequence of acting against this advice. The following pages of this website are informational materials only and are not intended to be used, nor may they be used, to engage in, or facilitate the engagement by others in, transactions that are prohibited under the laws of the United States or Canada. For guidance on the applicability of relevant Sanctions, please contact legal counsel. If you would like to engage attorneys at Dentons familiar with these issues please contact : Michael Zolandz, US, Paul Lalonde, Canada

Confirmation of understanding and acceptance of disclaimer

To visit the following pages of the website, you must confirm that you have understood the above sentences and agree to comply with the restrictions and that your use of the following pages is expressly conditioned thereon. By clicking "AGREE" in the box below, you will be deemed to have made this confirmation.

I have read and understood the disclaimer set out above. I understand that it may affect my rights and I agree to be bound by its terms.